Mechanic’s Lien Release Bond

A mechanic’s lien is a creature of statute and provides security for unpaid contractors, subcontractors, or suppliers who have worked on improvements to specific real property.  Colorado Mechanic’s Lien Statute, C.R.S. §§ 38-22-101, et seq.  Perfecting a mechanic’s lien claim is not a simple process.  To fully perfect a mechanic’s lien, the lien claimant must file a mechanic’s lien foreclosure lawsuit, by the statutory deadline, and prevail in the lawsuit.  The claimant must also timely record a “lis pendens” document with the County Clerk and Recorder’s Office.  This creates constructive notice of the lawsuit to the general public.

However, once a mechanic’s lien is recorded with the county Clerk and Recorder’s Office, even before the foreclosure lawsuit, and even if the lien is defective, the recorded lien can improve a claimant’s chances of getting paid, sometimes sooner than if the lien had not been recorded.  This is because a recorded mechanic’s lien creates an “encumbrance” on the property where the improvement was constructed, and the encumbrance might interfere with an owner’s ability to get financing on the property or to sell the property.  If a mechanic’s lien is recorded by a subcontractor, the lien can create conflict between the general contractor and the owner, and the owner might require the contractor to remove the lien, especially if the contract provides for that right.

The Colorado Mechanic’s Lien Statute provides that a mechanic’s lien can be released by the posting of a “mechanic’s lien release bond.”  This statutory procedure allows an owner, or a contractor on the owner’s behalf, to deposit a cash or corporate surety bond with the District Court Registry in the county where the property is located.  The required bond amount is 150% of the lien amount, plus an additional amount to cover costs.  Once the bond is approved, the court will issue a “certificate of release” which can then be recorded with the County Clerk and Recorder’s Office where the lien has been recorded, thus effecting a release of the mechanic’s lien.  C.R.S. § 38-22-131.   The bond statute specifies only that an owner may release a mechanic’s lien in this way, but in practice general contractors are allowed to do so on behalf of owners.  See., e.g., Weize Company, LLC v. Martz Supply Co., 251 P.3d 489 (Colo. App. 2010) (reciting that the trial court judge allowed the contractor in that case to file lien substitution bonds.).

Typically, the liened property’s owner is a “necessary party” to a mechanic’s lien foreclosure lawsuit because title to the owner’s property will be impaired by a judgment of foreclosure of the property.  If a mechanic’s lien is recorded by a subcontractor, and the dispute is only between the general contractor and the subcontractor, an owner will incur not only aggravation, but also attorney fees in defending the lien claims in the foreclosure lawsuit.  Thus, it is in the general contractor’s interest to avoid having the owner joined in a foreclosure lawsuit.

By procuring a mechanic’s lien release bond, and obtaining a certificate of release from the court (which can be accomplished in an “ex parte proceeding,” meaning the subcontractor lien claimant need not be part of the proceeding).  Once the certificate is recorded and the bond is released, the owner may no longer be a necessary party to a foreclosure lawsuit.  The reason is that the need for a lis pendens has been eliminated once the lien is released.  This procedural change was effected by the Colorado legislature in SB 11-264 which was passed in 2011 and which overruled Weize’s holding that a lis pendens was necessary even when a lien has been released by a substitution bond.  In this way, title to the property is completely freed from the lien claim and the owner need not be part of the foreclosure lawsuit.  There is no Colorado case law on this argument as yet, but it is a sound argument and it is likely to prevail if and when it is considered by the appellate courts.